Hog producers gear up for expansion

Editor's Note: The agricultural markets are as interwoven and interdependent today as they have ever been and are every bit as susceptible to the influences of the broader global economy as they are to basic fundamental factors such as weather and consumer demand. With that in mind, Feedstuffs' market coverage will deliver the livestock, grain and feed markets together in a single, cohesive column rather than presenting each sector in its own silo.

CAUTIOUS optimism — two words that are being used quite frequently in recent weeks to describe the feelings of market participants ranging from corn farmers to ethanol plant managers to pork and poultry producers.

With the prospects for a return to normal weather and near-trend corn yields, a rebuilding of livestock inventories may be in the cards after all.

Pork producers certainly appear to be feeling optimistic about their prospects, or are at least willing to take their chances feeding more hogs in the coming months as the U.S. Department of Agriculture reported a 2% growth in the U.S. hog inventory during the second quarter of 2013. The total inventory, breeding inventory and March-May pig crop all increased during the quarter, according to the quarterly "Hogs & Pigs" report released June 28 (Table).

"Most of these numbers came in near 100% (of 2012 figures), but there were a couple of outliers," explained University of Missouri livestock economist Ron Plain. "Pigs saved per litter was actually a new record, blowing away the old record of 10.15 and up 2.2% from last year."

Plain said analysts had expected a growth in pigs per litter of about 1%, but production efficiency continues to surpass expectations. The quarterly litter rate has increased steadily over the past decade, from roughly 8.9 pigs per litter in 2004 to 10.31 pigs in the latest report (Figure 1).

"We've been on a streak of those numbers being up," Plain said. "Hog producers are just getting better at what they do managing those sows and caring for those pigs."

The elephant in the room, of course, is porcine epidemic diarrhea virus (PEDV). With its potential to wreak havoc in the nursery, the emergent disease has analysts — and producers — wondering how the spread of the disease might hamper continued productivity gains.

Plain noted that PEDV could slow down further improvement in pigs per litter, possibly marking a setback in an otherwise fairly consistent trend of increased farrowing efficiency in the U.S.

He and Steve Meyer of Paragon Economics agreed, however, that, at this point, PEDV has not created much of a setback to U.S. hog production on a macro scale.

"We have about 200 confirmed premises (with PEDV) as of June 10 and another 40-50 reported this week," Meyer told reporters June 28. "If you do the math on it, even if those are pretty large and productive sow farms, so far, the losses have not been huge."

Certainly, PEDV didn't show much of an effect on the pig crop in the June survey. Even so, given the disease's emergence in the latter part of the quarter, the true effects may not show up until the September report or perhaps even later.

Meyer said he doesn't project much of an impact at this point based on what is known about the disease. While the industry is still studying how best to control PEDV and working to gauge how widely it might spread, analysts aren't necessarily viewing it as a showstopper for producers.

Hogs and pigs report, June 1, million head

Category

2011

2012

2013

% of 2012

All hogs and pigs

65.320

66.659

66.647

100

Breeding herd

5.803

5.862

5.882

100

Marketing herd

59.517

60.797

60.765

100

Groups in marketing herd

Under 50 lb.

19.543

19.871

19.676

99

50-119 lb.

17.321

18.119

18.052

100

120-179 lb.

12.174

12.203

12.339

101

180 lb.-plus

10.479

10.604

10.698

101

March-May period

Farrowings

2.917

2.982

2.921

98

Pigs per litter

10.03

10.09

10.31

102

Pig crop

29.292

30.077

30.111

100

Farrowing intentions

June-August

2.927

2.928

2.925

100

Sept.-Nov.

2.929

2.888

2.917

101

Source: USDA.

Expansion prospects

With the possibility of plentiful corn this fall and lower feed costs to follow, hog producers appear to be gearing up for expansion.

Farrowing intentions for the September-November period were reported at 101% of the 2012 intentions, which would mark a second consecutive period of quarter-over-quarter increases.

Pork industry analysts looking at the quarterly inventory figures released the same day as USDA's June "Acreage" report found plenty of evidence to support the notion of more hogs produced over the next year.

"I think next year we'll (see) 1.5-2.0% more pigs because of the productivity gains and the report earlier today showing 100,000 more corn acres than planting intentions (in March)," said Daniel Bluntzer, director of research with Frontier Risk Management. "We're going to have plenty of corn left over, and as the summer goes on, production will latch on to that, and we'll continue to increase the herd. We have to prepare for larger production going into 2014."

Indeed, USDA's acreage data shocked the trade with a projection of 97.4 million acres planted to corn. Traders had long assumed that the report would indicate fewer acres of corn and more acres of soybeans given late planting conditions; instead, USDA reported more acres of corn AND more acres of soybeans.

With farmers apparently planting fencerow to fencerow, livestock analysts are right to assume that lower feed costs are ahead.

If USDA's acreage number holds, farmers planted the largest corn area since 1936, and total production would easily top 14 billion bu. at the current weather-adjusted yield forecast.

As Plain concluded, pork producers are fairly adept at responding to the bottom line: More profits will lead to more sows farrowing. A big corn crop will mean lower feed prices and continued profitability for pork producers.

How long will that trend hold? Analyst Joe Kerns of Kerns & Associates noted that the recent improvement in profitability has brought the industry back from a fairly dark period.

"We're approaching a total pig crop that is near where we were when we hit some trouble spots in 2008," Kerns explained. "We don't seem to be in a tight situation now, despite how tight current grain stocks are. Old-crop prices are moving up, and new-crop prices are moving lower, and it would appear to me that pork demand is robust enough to carry us at profitable levels — even at higher-priced grain — to get through the second or third quarter, and then we'll have to deal with the opportunity cost of putting on another pound or two per animal. In general, I'm optimistic for the foreseeable future for the productivity of producers."

Likewise, the chicken industry continues to take advantage of relatively robust demand and retreating feed costs. Broiler-type eggs set was up 3% from last year for the week ending June 22, and cumulative chick placements for the year were slightly larger than last year at 4.11 billion.

Cattle conundrum

Beef producers, on the other hand, have been much slower to jump back on the reduced feed cost bandwagon. Prolonged drought in Texas and the southeastern portion of the country have kept many ranchers from getting overly excited about adding cows to their herds.

"It's going to be a slow process to rebuild herds," said Phil Sadler, president of the Independent Cattlemen's Association of Texas. "The numbers are not there."

Stan Bevers, a Texas A&M AgriLife Extension Service economist, said producers need to closely monitor expenses and track the performance of each cow.

"You can't manage what you don't measure," he said. "The whole point of being in business is to make profit."

Indeed, the cattle on feed numbers reported June 21 indicated that the on-feed inventory is running 3% smaller than last year, May feedlot placements were off 2% and May fed cattle marketings were the second smallest since the USDA series began in 1996 (Feedstuffs, July 1).

Weather in Texas continues to brutalize ranchers in the region, and a recent spate of hotter-than-normal temperatures really beat up on corn in the state.

In San Antonio, Texas, a 108 degrees F day was the hottest since the 1800s, when recordkeeping began, according to Aaron Treadway, a meteorologist with the National Weather Service in New Braunfels, Texas. During the first days of July, on the other hand, record lows were broken.

"It's been pretty much a roller-coaster ride of extreme temperatures," Treadway said. "It'll warm back up as we get into the middle of July, and we'll see temperatures back in the century mark."

Last week, the same high-pressure zone that blocked cooler air from the north and caused extremely hot weather on the West Coast was also behind the extreme highs in Texas, Treadway explained.

While the Corn Belt has seen more or less benign crop production weather (compared to last year, anyway), already beleaguered Texas producers haven't been able to catch a break.

Indeed, only 51% of the Texas corn crop was rated in good-to-excellent condition as of June 30, with 66% of the crop already in the silking stage. Heat and precipitation during the critical pollination period will make or break a crop.

Nationally, conditions are running much better than last year: Corn is rated 67% good to excellent, with just 3% of the crop silking across the 18 major corn-producing states, according to by USDA's weekly "Crop Progress"report.

Pasture and rangeland conditions, meanwhile, continue to fare much better than last year. As of June 30, 51% of the nation's acreage was rated good to excellent, compared with just 25% during the same drought-stricken week in 2012.

Continued improvement in pasture conditions, improved hay production and lower corn prices will all play a role in getting cow/calf producers to retain more heifers and put more calves on the ground.

Plus, as ethanol production continues to ramp up, the availability of distillers grains also improves.

Feed costs

Speaking at the U.S. Poultry & Egg Assn.'s annual financial management seminar last week, economist Paul Aho with Poultry Perspectives presented a much more optimistic economic forecast for the poultry sector.

Although the U.S. and other countries have weathered severe challenges in recent years due to drought, he projected a brighter future, with the U.S. "finding its second gear."

"We're headed in a good direction after two bad years of low production," Aho explained. "Supplies of corn and soybeans are increasing. There will be a re-acceleration for the next couple of years."

Aho noted that poultry meat consumption could increase, especially in the developing world, due to growing populations and a growing middle class, specifically in China.

"The big news is that poultry surpasses red meat consumption in the U.S. This is as good as it gets," Aho concluded.

He also projected that "commodity, grain and energy prices will come down as the world economy improves. That is the opposite of what occurred a few years ago during the recession, which is a sweet spot."

Indeed, USDA presented a scenario for much lower feed costs: the "Acreage" report showed that 100,000 more acres of corn were planted than what farmers intended to plant in March and 2.1 million acres more than analysts' pre-report estimates.

Meyer, writing for the "Daily Livestock Report," pointed out that USDA's 89.1 million-acre estimate for harvested corn area implies a harvest rate of 91.5%, significantly higher than last year's 89.9% but slightly lower than the 91.8% average for 2007-11.

Should that many acres be harvested and should they yield the latest USDA estimate of 156.5 bu. per acre, this crop would be a bin buster, at a record-large 13.944 billion bu.

Meyer and fellow economist Len Steiner said the massive acreage bump spells one word in very large letters: RELIEF.

"Using the pork industry as an illustration, current corn and soybean meal futures imply costs of just more than $80/cwt. (carcass basis) for 2014," Meyer and Steiner wrote following the report (Figure 2). "That figure is more than $13/cwt. — or roughly $26 per head! — lower than this year. Though lean hog futures imply hog prices (that will be) roughly $4.50/cwt. lower next year, the decline in costs imply profits of just over $10 per head, the best for an entire year since 2010."

Corn, soybean prospects

Heading into the July 4 holiday, corn prices continued to slip toward $5/bu., while soybeans continued to firm toward $13. Markets closed early July 3 and were due to reopen Friday after Independence Day.

Examining price prospects for both crops following the June USDA reports, University of Illinois economist Darrel Good said the quarterly "Grain Stocks" report indicated continued tightness in the pipeline, while the "Acreage" report confirmed the potential to rebuild stocks in the not-so-distant future.

"The June 1 stocks estimates for corn and soybeans confirmed very small inventories and the need to continue to limit consumption until new-crop supplies are available," Good wrote. "As a result, old-crop corn and soybean cash prices are expected to be well-supported through the summer months."

On the other hand, Good pointed out that there is considerably more uncertainty about new-crop production and price prospects and shared some of the trade's skepticism about the corn acreage figure in particular.

"We expect planted and harvested acreage of both crops to be less than revealed in the June survey," he explained. "However, production will be influenced more by yield prospects than by acreage estimates. The period for determining yields is just beginning, with July and August weather critical for both crops. Based on current crop condition ratings and near-term weather forecasts, prospects for yields likely exceed current market expectations, particularly for corn. If weekly condition ratings remain high, new-crop prices are expected to remain under pressure."

Indeed, the latest condition ratings indicate a crop that is performing much better at this point during the season than the 2012 crop was. On the other hand, the crop is still slightly behind last year's in terms of development, with just 3% of the crop silking nationally as of June 30, compared with 9% during the last week of June 2012.

Like Good, Purdue University economist Chris Hurt was somewhat taken aback by USDA's large acreage figures.

"The real surprise in this report is that we didn't see the shift we expected from corn acres to soybean acres because of delayed planting," Hurt said, cautioning that the acreage number is still fairly fluid. "These numbers certainly aren't the final numbers."

Hurt estimated that corn prices could fall to $5/bu. for the 2013 crop average and $11.75/bu. on new-crop soybeans. With high production costs this year, those price points would still be enough to at least cover many producers' expenses.

"Higher production gives us a chance to begin rebuilding more grain inventory, which helps keep prices from being as extreme and volatile," he said. "We've had very low inventories of old-crop corn and soybeans from poor weather in the last three growing seasons, so we've been on pins and needles with the available supplies."

The question of covering corn production costs is not a trivial one, however. A recent report from Rabobank's Food & Agribusiness Research & Advisory Group suggests that softer prices in the medium term could push below breakeven levels.

"The three largest drivers of U.S. grain prices over the next few years will be demand from the U.S. ethanol industry, import demand from China and supply performance in Brazil," Sterling Liddell, Rabobank vice president and author of the report, said. "It is our belief that corn prices will adjust lower, with a long-term midpoint of around $5/bu. We also anticipate that U.S. corn exports will struggle to regain 2009 levels as farmers are impacted by tighter margins."

Liddell's report projects flagging demand growth for biofuels in the U.S. and Europe, in addition to an overall improvement in Brazil's ability to efficiently export corn to Asia. As those factors pair up with a return to near-trend yields in the U.S., prices and margins will fall over the next three to five years.

The report points out, however, that two very significant wild cards during that same period are U.S. weather and demand from China.

Liddell said he believes growth in China's overall demand for grain and oilseed imports is likely to moderate in the medium term as meat demand slows from its recent high levels, despite the likelihood that continued rapid industrialization of China's own animal protein industry will continue.

Given normal conditions through the remainder of the 2013 U.S. growing season, the Rabobank report projects corn prices to be pressured to below a breakeven of $5/bu., based on a cost of production ranging between $4.40 and $5.20/bu. (Figure 3).

As prices for land, seeds and chemicals continue to hold at fairly strong levels, grain producers will be increasingly pressured to make difficult decisions that will ultimately decide their profitability. So, while livestock producers — especially pork and poultry producers — look toward better days through kinder, gentler feed prices, feed producers may be looking at much the opposite situation.

Biotech wheat update

The question of how unapproved genetically modified wheat ended up in a small volunteer stand in Oregon became somewhat clearer last week as USDA acknowledged that some of the seed was kept in a government storage facility in Colorado until at least late 2011.

In a story first reported by Reuters, USDA's investigation into the Oregon discovery is now examining the handling of the biotech wheat seed that Monsanto sent to the government-controlled National Center for Genetic Resources Preservation in Ft. Collins, Colo., beginning in late 2004.

The center uses high-tech methods to extend the viability of seeds for decades — much longer than their viability in conventional storage.

According to the Reuters report, the facility took in at least 43 physical containers of Roundup Ready wheat seed in late 2004 and early 2005, when the company was shutting down its biotech wheat program.

While USDA has stressed that no biotech wheat made it into commerce, the investigation has not yet revealed how the seed appeared in Oregon some nine years after the last field trials there were discontinued.